MPS Finds Clarity, but the Hard Part Begins
Luigi Lovaglio’s return restores a clear direction at Monte dei Paschi, but turning a commercial lender and an investment bank into a coherent group will demand time, discipline and political calm. A commentary by Ignazio Angeloni
The dramatic turn on April 15, when Monte dei Paschi shareholders unexpectedly rejected the board’s proposal and restored chief executive Luigi Lovaglio, has two positive consequences.
The first is strategic clarity. At this point, the bank’s direction once again coincides with the plan Lovaglio himself presented in February.
That plan envisages the merger of Mediobanca into MPS in order to pursue a fairly unusual experiment in Italy: extracting synergies from two institutions that are profoundly different in nature — an investment bank centred in the north, and a traditional lender with a dense network of brick-and-mortar branches across central and northern Italy.
What those synergies might amount to is worth examining in a moment. But the second piece of good news should be noted straight away: the reinstatement of an operating chief who knows the bank, commands respect and support internally, and has shown that he can design and execute long-term plans. That will be essential. Compared with these two developments, the renewed uncertainty over the shareholder structure — setting aside the still unresolved Generali issue — is of secondary importance.
It is therefore understandable that the market welcomed the outcome. But the celebrations should now end, because the real challenges begin here.
The two entities differ not only in business model, but in institutional history, corporate culture, workforce profile and professional identity. Making them work together will not be easy. It will require radical change, a long timeframe and inevitable resistance.
The opportunities, however, are the most interesting part of the story.
The debate over how to combine commercial and investment banking, capturing the upside while containing the risks, is at least a century old.
In the twentieth century, this model helped turbocharge the economic expansion of the 1920s, but it also amplified the speculative excesses that culminated in the Great Depression.
In the aftermath, universal banking was demonised and effectively outlawed, first in the US and then more broadly across the world. Andrew Ross Sorkin’s recent book 1929 recounts that history well.
By the end of the century, the model had returned to favour and the legal constraints were dismantled. Its advantages came back into focus, and were exploited above all by the largest US banks. Their experience suggests that the synergies essentially come in three forms.
First, revenue diversification: because the two lines of business move differently over the cycle, combining them can make earnings more stable.
Second, the centralisation of services — what the English-speaking world calls a one-stop shop — an organisational model that allows a diverse client base to access the services it needs more efficiently.
Third, access to a stable liquidity pool: commercial banking provides it through deposits, while investment banking needs it to manage risk, meet prudential requirements and absorb the cash demands associated with securities trading.
Can the merger now under discussion deliver these results? Perhaps — but only gradually, and only under certain conditions.
MPS’s recent profitability has been striking, but it has been driven in large part by external factors — notably the macroeconomically induced rise in net interest margins — and underpinned by rescues funded by taxpayers.
Those tailwinds have now run their course. The February strategy aims to consolidate their effects, but does so on fairly optimistic assumptions about organic growth.
Building a centralised service model will take time and effort, given the institution’s dual identity. It will require a long process of making languages, habits and mindsets compatible, while creating the internal scale needed for communication and cohesion.
By contrast, liquidity and funding look reassuring, especially for Monte dei Paschi, whose metrics remain stronger than the system average.
As the dust raised by the shareholder battles begins to settle, the more fundamental questions come into view: how should this episode — and its outcome — be judged against the issues that really matter, namely the strength and vitality of Italy’s banking system and Europe’s competitiveness?
From that perspective, the verdict is mixed, but still grounds for confidence.
Were there other possible combinations, perhaps easier ones? Yes. Mediobanca itself had pointed to one before that option collapsed.
Does Italy particularly need a third banking pole? Not really, and the new Monte dei Paschi does not materially alter the competitive geography of the domestic banking system.
Does this help create European banking champions — a strategic issue at a moment when the ECB has finally embraced Mario Draghi’s call for a single jurisdiction for cross-border banks? No. It is largely irrelevant on that front, because the new group will need years of internal work before it can have any meaningful impact in Europe.
Even so, the emergence of a new player, built around an original concept and overseen by a board rich in expertise, adds energy and diversity to the Italian landscape.
Good luck, Mr Lovaglio.
A previous version of this article was published in the Italian daily MF - Milano Finanza
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
